I consider myself to be pretty savvy in retirement / investment related topics. After all, I’m an avid reader of personal finance-related publications. And, over the past 25 years I’ve researched and owned a broad set of investment products.

So, when today I discovered I had made, if left unchecked, what would have been a very costly mistake, I was a little blown away (“...how in the hell did I miss that one?”).

You, OR YOUR PARENTS, may also benefit from my new-found enlightenment.

"HOW SHOULD I HANDLE BENEFICIARIES?"

Recently, my mother moved a chunk of her IRA to a new institution. While completing the account application, she asked “...how should I handle the beneficiaries?”. Her intent was to have the estate equally divided amongst her children. And, in case a beneficiary was to pass prior to her, leave that portion to the beneficiary’s kid(s).

She already had a will, so my response was “leave it blank”. I thought that by letting the IRA pass to the estate (which was covered by a will), her wishes would be fully covered.

But, according to an article published in today's Wall Street Journal, I was 100% wrong. And, left unchecked, the mistake would have been very costly to my siblings and me. Here's why...

WHEN IT COMES TO AN IRA, THE WILL IS IRRELEVANT

It turns out, based on an article in the WSJ titled “How Retires Are Blowing Their Nest Eggs,” when it comes to IRAs: “The way an IRA gets passed along to your heirs is governed by the beneficiary form you are supposed to fill out when you open an account.”

Based on what I’ve gleamed from the article, by not naming beneficiaries, “...your heirs lose the ability to stretch their withdrawals over their lifetimes, which means they would lose out on the potential for decades of tax-free growth of your assets.”

And according to the accountant quoted in the article, "In some cases, naming the estate as the beneficiary could even prevent your spouse from being able to roll the plan into his or her own IRA”.

MY ACTION ITEMS

While I am not an attorney (and this is not investment advice), I plan to take a good hard look at both my own and my mother's retirement accounts, to make sure that beneficiaries are explicitly named.

The WSJ also mentions that you should keep a copy of the beneficiary designation, on the chance it is misplaced by your financial institution.

REGARDING THE KIDS...

Again, according to WSJ, if you check "per stirpes" on the beneficiary form, assets will go to your beneficiary’s children if he or she dies before inheriting your IRA.

about - portfolio - feedback - disclaimermortgage calculator